The Securities and Exchange Commission's Office of Municipal Securities on Wednesday published a statement regarding its views on a municipal advisor's obligations under federal securities laws depending on the role – if any– the MA performs in the disclosure process.
The statement is significant, as such explicit guidance from the SEC on its interpretations of the federal securities laws gives muni advisors and their lawyers a more thorough understanding of how the regulator views their responsibilities.
"This staff statement addresses a municipal advisor's role in preparing a municipal entity or obligated person's primary and secondary market disclosure documents, a role which may vary widely, ranging from no participation to primary drafting responsibility," the statement said.
The statement includes discussion of a variety of topics, including the question of when does participation in disclosure document preparation "constitute 'advice' and 'municipal advisory activity' for purposes of the municipal advisor definition." Other topics addressed include how an MA's fiduciary duty, including its duty of care, impacts its responsibilities and potential liability when participating in disclosure document preparation.
"There are many key considerations raised in the document that MAs need to review to determine if and how MA client work falls within the disclosure framework, and the obligations that come with that," Susan Gaffney, executive director of the National Association of Municipal Advisors, said Thursday.
Gaffney added that the statement's "discussions on SEC MA and anti-fraud rules, and pre and post Dodd Frank Act SEC enforcement actions are helpful to better understand how OMS views MA disclosure responsibilities."
While the statement includes references to SEC enforcement actions, "discussion of enforcement actions is provided for general reference only and is not meant as a comprehensive overview of situations that may give rise to municipal advisor liability," the statement said.
The fresh guidance regarding MAs' role in disclosure comes after Dave Sanchez, director of the Office of Municipal Securities, earlier this year signaled a sharper focus by the SEC on whether MAs are fulfilling their duties to clients. During a panel held as part of a joint compliance outreach program last January, Sanchez said "when the municipal advisor regime came in a little over a decade ago" – a reference to the SEC's municipal advisor rule that went into effect in 2014 – much of the SEC's early focus was just on making sure people had signed up and filled out forms correctly.
Now, however, the SEC is moving into "the next phase," where it's eyeing whether MAs are "fulfilling the substantive aspects of their responsibilities," Sanchez said during the panel, pointing to the duty of loyalty and duty of care MAs owe to their municipal entity clients under Municipal Securities Rulemaking Board Rule G-42.
The section of the statement regarding how an MA's fiduciary duty impacts its responsibilities and potential liability when participating in disclosure document preparation, said that while fiduciary duty and antifraud liability are legally distinct, there could be situations when an MA's fiduciary obligations – such as a duty to disclose all material conflicts of interest to a municipal entity or obligated person – might be relevant in determining whether an MA knows or should have known of a material misstatement or omission in a municipal entity's disclosure document.
"For example, in the staff's view, if a municipal advisor is involved in the preparation of disclosure documents, that municipal advisor should consider whether the failure to disclose information about such municipal advisor's business and financial relationships and arrangements with other parties to the transaction, including the issuer, such as those that create conflicts of interest, would be materially misleading to investors (and thus should be disclosed)," the statement said.
